Description

Pitch

Canada Goose ("GOOS" or the "Company"), a luxury outerwear parka-focused brand, is a strong brand with significant runway for retail footprint expansion, trading attractively at near all-time low valuation (exhibit 1) on trough earnings. The Company is trading at ~40% discount to my FMV estimate, which I expect will compound double digit for 5+ years. I believe GOOS currently presents a highly asymmetric risk/reward of significant upside when China business recovers and very limited risk of capital loss even if China is a dud.

Although the Company executed impressively on transitioning towards DTC model, expanding its DTC footprint, and broadening its apparel categories, earnings have languished as COVID-induced demand barrier weighed down on store productivity and the Company invested ahead of growth/recovery. As a result, GOOS has posted one of the worst earnings performance amongst peers despite the best-in-class topline growth. Combined with concerns around China exposure, market share loss in China, and a number of other one-off noises, market sentiment hit rock bottom with current share prices implying that current profitability are the new norms for GOOS and that GOOS's growth runway is limited. I believe both are wrong. GOOS is a brand with staying power and momentum that has a highly attractive profitable growth opportunity. I expect GOOS's EBIT to grow to nearly CAD$500mm by FY2028 as GOOS 1) recovers from ~40% depressed store productivity due to COVID-induced demand barriers and 2) continues to execute on its highly accretive, long runway of double-digit % DTC retail footprint expansion.

1. For GOOS, current operating environment is still far from a fully normalized environment. Prior to COVID, roughly half of GOOS's business was driven by international tourism, of which China accounted for a disproportionate share. Chinese outbound tourism spend is still ~95% below 2019 levels (exhibit 3) and I estimate that GOOS's DTC retail productivity is still only ~60% of pre-pandemic levels due to such. With incremental/decremental contribution margin of ~50%, current DTC retail stores productivity has resulted in GOOS's LTM EBIT margin of ~15%, ~1,000 bps compression vs. pre-pandemic high. As China's COVID policies are relaxed and Chinese international tourism spend recovers, I expect GOOS's store productivity to see incremental 30+% uplift from current levels. This alone adds incremental 10+% revenue and 35+% EBIT before further footprint expansion. If LFL contribution of international tourism fully recovers to pre-pandemic levels, that adds 25+% revenue and 80+% EBIT. GOOS should be able to post robust comps over the next ~5 years given such unique backdrop, which is precisely why I believe management has changed its KPI reporting to comparable sales growth this year (who wouldn't want to start reporting comps on trough comps).
    

Key question is will GOOS's weakening performance in domestic Chinese market translate to below expectations store productivity uplift from Chinese outbound tourism recovery? It could, if GOOS does fall out of favor from Chinese consumers. GOOS has been losing market share in domestic Chinese market to Moncler, a higher-end luxury outwear brand, and Bosideng, a value-focused outwear brand. I believe this is more a cyclical phenomenon than structural phenomenon. China has been seeing wealth inequality worsen over time (exhibit 4) and there's been a barbellization of consumer spending towards premium and value*. Combined with Chinese consumer confidence hitting record low (exhibit 5), "‘trading down’ has been the most visible consumer trend year to date" and there's been "pressure on the entry-level luxury segment" (per Chinese retail participants/experts). GOOS should have been a direct casualty of such given its market positoning / price points and data points such as social media activity trends (exhibit 6), massive crowdings for GOOS stores (exhibit 7), and local industry participants  supports the notion that GOOS brand remains strong in China. GOOS continues to be a highly sought after brand amongst Chinese consumers and even the PR screw up in late 2021 is turning out to be one of many Chinese PR screw ups / boycotts that are quickly forgotten. With GOOS doubling down on Chinese consumers through a) appointment of Larry Li, former China exec at Richemont/LVMH, as President of China operations, b) appointment of Belinda Wong, former CEO / current Chairman of Starbucks China, to BoD, and c) continued investments into branding and retail stores, I am comfortable with their ability to execute on both DTC China expansion and maintaining/winning the wallet/mind share of Chinese consumers. With the brand intact, potentially even strengthening, GOOS should regain share in China as the Chinese economy and consumer confidence recovers. Combined with GOOS gaining momentum and share across the globe, ex-China, that bolster individual market/store economics AND increase addressable DTC retail whitespace to capture international tourist spend demand, I believe GOOS will be one of the biggest beneficiary of Chinese outbound tourism rebound.

*Some could argue this is a secular phenomenon driven by global trend of widening wealth/income inequality, China is unique in its steadfast goal towards achieving "Common Prosperity". I believe China's march towards "Common Prosperity" will reverse the widening inequality in China and serve as an ingredient to both recovery from cyclical headwind GOOS faces and today and potentially become a secular tailwind. This should also feed into incremental tailwind behind Chinese outbound tourism demand once China re-opens/recovers.
 

2. GOOS currently only has 45 DTC stores across the globe. MONC has 240+ stores just for the Moncler brand and many other luxury brands also have triple digit store count. GOOS since accelerating the expansion of DTC retail footprint in 2020 has opened 9-13 stores a year, and is expected to open another 13 stores this fiscal year. While it is unclear exactly how many stores GOOS is contemplating as its end state given they don't envision building a network of "hundreds" of stores, it doesn't take much imagination to see GOOS open 8-10+ stores a year for a decade or so. With GOOS succeeding with new store formats such as smaller stores (~2,500 sq. ft.), inventory-free stores, new geographies (i.e., Japanese JV, etc.), I believe GOOS can easily open 10+ stores a year and grow DTC retail store count double digit % for years to come at attractive ROI. 
   
   This growth of DTC retail footprint will lead to highly profitable growth for GOOS. Although profitability and ROI has been deteriorating significantly as GOOS accelerated its transition towards DTC (exhibit 2) and there may be questions around the value creation related to DTC, it is highly accretive for GOOS. DTC sales allow GOOS to capture the entire value of each sales, generating 2x $ revenue and 3x $ gross profit through DTC vs. wholesale. The profitability and ROI decline since the acceleration of transition to DTC is a transitory phenomenon due to COVID-induced demand barrier, not the DTC model itself. As international tourism returns, profitability and ROI will improve meaningfully as mentioned above and new DTC retail store openings will normalize back to <2 year paybacks, year two CoC to 60+%, and $4-5mm mature EBIT and margin of 50+%. With highly attractive economics, DTC expansion for GOOS will continue to create value for its stakeholders and DTC retail openings alone should contribute LDD+ % EBIT growth even in out years as far as FY2028. More importantly, however, the DTC transition has allowed GOOS to control the narrative of its brand, grow the brand, and successfully expand into adjacent categories, all of which I would argue has created irreplaceable intangible and tangible value for GOOS.

Risk / Reward (~5.25 years through FY2028)

• Base case: 2.7x-3.1x MOIC at 14x-16x LTM EBIT (~4% implied LTM FCF yield)
• Recession + Chinese tourism business total $ grows LDD% (est. LFL contribution <50%)
• Bear case: 1.4x-1.7x MOIC at 12x-14x LTM EBIT (~4% implied LTM FCF yield)
• Hard landing + Chinese tourism business total $ is flattish vs. pre-pandemic (est. LFL contribution <30%)
• Bull case: 4.7x-5.8x MOIC at 16x-20x LTM EBIT (~3-4% implied LTM FCF yield)
• Soft landing + Chinese tourism business total $ grows ~20% (est. LFL contribution <90%)

Key Investment Highlights and Risks

Highlights

• Brand - market leading, impressive brand known for quality and innovation + brand gaining momentum ex-China + brand still strong in China
• DTC expansion runway - underrepresented in virtually every country with the exception of Canada
• Brand extension / adjacencies - successful expansion into lightweight jackets, knitwear, footwear, etc.
• Vertical integration - in-house manufacturing with strong quality and inventory sourcing
• Strong management team + shareholder alignment - Dani owns ~20%

Risks

• China (Chinese economy / market share)
• Mitigants: stimulus, COVID relaxation, GOOS execution
• Brand fatigue / limited TAM of parkas
• Mitigants: Brand extension and category expansions + outwear purchases are frequent (4+ a year)
• Inventory management
• Mitigants: classic pieces with limited risk of discounting / obsolescence
• Sponsor overhang
• FX

Exhibit 1 (EV / NTM EBIT)

Exhibit 2 (GOOS ROIC + EBIT % Margin)

Exhibit 3 (Chinese tourism spend)

Exhibit 4 (China income inequality)

Exhibit 5 (Chinese Consumer Confidence)

Exhibit 6 (Chinese social media activity)

Exhibit 7 (Soho store during sample sale - 11/16/22)

https://weibo.com/tv/show/1034:4836431554871385?from=old_pc_videoshow

Catalyst

Real stimulus in China (i.e., property stimulus, etc.), China COVID relaxation (i.e., Xi comment, etc.), comps